Annua Rert - Conexus Credit Union...Co-operative Principles Annual Report • 2008 1 About Conexus Conexus is a home-grown Saskatchewan company and we believe in putting our members,

Annual Report • 2008 1

Annual ReportYour legacy, your future, your Saskatchewan.


Our Vision

The future is an exciting place for Conexus. We will be recognized as a member-owned, leading-edge financial services provider, locally, provincially and nationally. We will pursue new economic

opportunities while honouring our past and respecting core credit union principles. We will stand apart as a financial services provider and corporate citizen that cares and listens.

Conexus has deep roots in our communities and a rich heritage. Our corporate culture will continue to draw on our co-operative spirit, our shared values and social responsibility.

We will be responsive to change and to new market environments. We will be a leader in the financial industry: accessible, ethical and respected.

Conexus will continue to grow. Our culture will remain one of trust and professionalism. We will be the financial services provider of choice in our markets, and the employer of choice in our communities. Members, customers and staff will feel valued, respected and proud to be part of the Conexus family.

Our Values

� Honesty � Integrity� Trust � Respect� Ethical Conduct � Professionalism� Empowerment � Inclusiveness � Accountability

Our Vision and Values

ContentsAbout Conexus ....................................... 1

Message from the Board ........................ 2

Message from the CEO ........................... 6

Management Discussion & Analysis ..... 7

Management’s Responsibility ............16

Auditors’ Report ................................... 16

Consolidated Statement of Financial Position ................................. 17

Notes to Financial Statements ............. 21

2 0 0 8

Annual Report

Co-operatives around the world are guided by the same seven co-operative principles. They include:

� Voluntary and Open Membership� Democratic Member Control� Member Economic Participation� Autonomy and Independence� Education, Training and Information� Co-operation Among Co-operatives� Concern for Community

SOURCE: Canadian Cooperative Association

Co-operative Principles


About Conexus

Conexus is a home-grown Saskatchewan company and we believe in putting our members, customers and communities first. Our corporate culture reflects the

co-operative spirit and encourages strong commitment to social responsibility.

In the credit union tradition, Conexus is committed to providing unique and innovative products and services. Today we offer you integrated financial options through a complete range of products and services including credit union banking, trust and estate services, wealth services through Credential Financial Strategies Inc., real estate through CENTURY 21 Conexus Realty Ltd., the convenience of a mortgage brokerage through CENTUM Canada Mortgage Direct Ltd. and a full range of general insurance products through Conexus Insurance Ltd.

Conexus Credit Union is Canada’s seventh largest credit union with $3.67 billion in assets under management. Offering a broad range of retail banking, wealth services and commercial business products and solutions, our employees are able to provide customized financial solutions. In addition, we offer the services of CU Dealer Finance Corp., an on-site financing option for vehicle and leisure craft purchases.

CENTURY 21 Conexus Realty Ltd. is the largest real estate company in Saskatchewan. With more than 200 CENTURY 21 Conexus Realty Ltd. agents, we strive to be the best in the Saskatchewan marketplace. In 2008, CENTURY 21 Conexus Realty Ltd. was recognized for the third consecutive year as the number one franchise in Canada in both production (total value of all houses sold) and units (total number of houses sold).

CENTUM Canada Mortgage Direct Ltd. has seven locations and a team of expert mortgage brokers who are ready to assist you in selecting the right mortgage option. They provide professional guidance and are committed to finding the best available financing.

Conexus Insurance Ltd. offers a range of products including home, vehicle, agriculture and large scale commercial policies along with motor vehicle licensing. From ten locations throughout Saskatchewan, our Conexus Insurance representatives have access to coverage that meets your needs.

Our Communities Looking after communities is something Conexus employees do with pride. In 2008, Conexus staff and sales professionals committed more than 38,000 personal volunteer hours toward community initiatives.

We also support communities through the Conexus Community Development Fund. In 2008, the Community Development Fund invested more than $506,000 into capital and legacy initiatives for community-based, charitable and volunteer organizations throughout the province.

Our Conexus community investment sponsorship program touched more than 1,500 community initiatives. More than $975,000 was provided to community organizations in the areas of health and wellness, arts and culture, youth and education and sports and recreation.

We look forward to continuing to do our part in the places we call home - now and into the future.

We offer a range of products and services and experts with solutions for your life at:

� 47 Credit Union branches �7 CENTURY 21 Conexus Realty Ltd. offices� 10 Conexus Insurance locations �7 CENTUM Canada Mortgage Direct Ltd. offices

Conexus offers convenient access to financial services 24 hours a day from virtually anywhere in the world. We offer Net Banking at www.conexus.ca, automated Voice Response banking at 1-800-567-0101 and TeleService Relationship Managers are available at 1-800-667-7477. For added convenience we have ATMs located throughout the province and our family of card products can help you access funds when and where you need them.


The Conexus Group of Companies has 71 locations serving you throughout Saskatchewan.

Credential Financial Strategies Inc. is a member company under Credential Financial Inc., offering financial planning, life insurance and investments to members of credit unions and their communities.

Annual Report • 2008 2Annual Report • 2008 2

Message From the Board

It has been an exciting and successful year for Conexus! On behalf of the Board of Directors, I’d like to extend our thanks to the membership for their continued support

and partnership throughout Saskatchewan. Together, we will continue to build a strong and prosperous province, now and into the future.

Last year brought with it some uncertainty as the global economies and markets remained in a constant state of fluctuation. The Board of Directors sincerely appreciates the dedication and expertise of Conexus staff and management who worked diligently to make 2008 another successful financial year.

As a member you are an owner of Conexus Credit Union and have the opportunity to share in our financial success. The Board of Directors is excited to announce a patronage payment of $6,064,937 for this year. We have a lot to celebrate.

2008 was not only successful financially, it was also a year of building partnerships, expanding and innovating. We were able to welcome a new Saskatchewan community – Saskatoon – to the Conexus family. We look forward to serving the growing needs of all our members and customers throughout our province.

I’m confident that the success achieved in 2008 will help our organization become stronger in the months and years ahead. With your support, Conexus will continue to be innovative leader in the financial industry and focus on what is truly important to all of us – our Saskatchewan.

Norbert Fries, Chair On behalf of the Board of Directors

What is patronage?When you purchase a membership share at Conexus Credit Union, you become an owner. As an owner, you are eligible for patronage*. The patronage payment represents a percentage of interest paid and earned during the past year. For 2008 the Board approved a member patronage return of 4% of qualifying interest paid and recieved on personal accounts and 2% on non-personal accounts.

How are the funds distributed?The patronage payment members receive will accumulate in a Non-Redeemable Equity Account and become available when a member reaches the age of 60. Business members have access to their equity accounts as a portion of their funds are distributed each year. Contact us for more information.

Success is contagious at Conexus Credit Union and membership pays!

Board of Directors

Back Row: Maurice Nekurak (District 2), Gerald Unger (District 3), Norbert Fries – Chair (District 2), Wayne Kabatoff (District 4), Don Blocka (District 4), Randy Grimsrud – Vice-Chair (District 1)

Front Row: Loretta Elford (District 1), Sherry Knight (District 1), Ed Gebert (District 1), Laverne Goodsman (District 3), Glenn Hepp (District 5)

*some conditions apply

At Conexus Credit Union, membership is valuable to you. We pass on our success to our members by way of a patronage payment. This year we are pleased to announce a patronage payment of .$6,064,937


Board of Directors

The Conexus Board of Directors is committed to effective governance and continuous improvement. We consider strong credit union governance practices to be essential

for our long-term success and to assure our stakeholders that Conexus is being operated and managed appropriately, ethically and in the interest of our members.

Our directors are elected by district and are responsible to act in good faith in the best interests of the credit union and all of its members. Our current board composition is as follows:

District 1 – ReginaSherry Knight – expires 2010 Randy Grimsrud – expires 2011 Loretta Elford – expires 2012Ed Gebert – expires 2012

District 2 – Moose Jaw/AssiniboiaMaurice Nekurak – expires 2011 Norbert Fries – expires 2012

District 3 – Fort Qu’Appelle/MoosominGerald Unger – expires 2010 Laverne Goodsman – expires 2012

District 4 – Prince AlbertDon Blocka – expires 2010Wayne Kabatoff – expires 2011

District 5 – Humboldt/SaskatoonGlenn Hepp – expires 2010

Board Committees

As provided by the Credit Union Act, 1998, the Board is responsible to direct the management on the business affairs of the credit union. Board committees are formed

to assist the Board in fulfilling its fiduciary duty to oversee management and the operations of Conexus.

The Board has the following standing committees:

Governance Committee Responsible for maintaining governance structures and processes.

Conduct Review Committee Responsible for overseeing conduct and ethical business standards.

Audit and Risk Committee Responsible for overseeing risk management and financial reporting integrity.

Human Resources and Compensation Committee Responsible for the CEO’s performance evaluation, compensation and succession planning.

Nominating Committee Responsible for the organization and administration of director elections.

Community Development Committee Responsible for the administration of the community development funds.


Chaplin Swimming Pool — The swimming pool in Chaplin is a busy place during summer months for kids and adults alike! The Conexus Community Development Fund committee saw an opportunity to assist with the costs of repairing the furnace and chimney ensuring that the pool would continue to be a hub of activity for the community and surrounding area.

You can learn more about the Conexus Board of Directors and our credit union’s governance on our website at www.conexus.ca/boardofdirectors.html.


Vintage Heritage Museum — Conexus is proud to help history come alive at the Vintage Power Machines Museum in Prince Albert. Visitors are treated to vintage machinery, artifacts, household antiques and buildings restored to their natural state.


Conexus Community Development Fund & Regional Advisory Committees

Through the Conexus Community Development Fund the Conexus Board of Directors is proud to help the communities we serve by investing in capital or legacy projects.

Regional Branch Advisory Committees act in an advisory capacity to the Board and are the initial review body that discusses and makes funding recommendations to the Community Development Committee. The Community Development Committee is accountable for administration of the Community Development Fund and makes final decisions regarding investments.

In 2008, the Conexus Community Development Fund invested $506,000 in a variety of community projects including:

Assiniboia 55 Club Inc.Briercrest Community CentreCentral Butte Royal Canadian LegionConexus Arts CentreCosmo Senior Citizens’ CentreDrake Silver Sages Inc.Lanigan Youth CentreMarkinch Recreation BoardNew Dance Horizons Inc.Prince Albert Field HousePrince Albert Fire and Emergency ServicesRanch Ehrlo Sports Venture ProgramRegina Lutheran HomeRegina Palliative Care Inc.

For further information, contact your local Conexus branch manager.

Rocanville Aquatic CentreRocanville Curling ClubSt. Louis Skating RinkSt. Paul’s HospitalSukanen Elevator FundSmart Families Food Co-opTown of Fort Qu’Appelle Skateboard ParkTown of La Ronge Skateboard ParkTown of Wakaw Bowling AlleyVintage Heritage MuseumWhitewood Community CentreWhitewood Community StageWinston Knoll CollegiateWood Mountain Historical Society

Photo: Ranch Ehrlo Outdoor Hockey LEague, Regina

Our five Regional Advisory Committees represent the following geographic districts: Regina, Humboldt /Saskatoon, Moose Jaw/Assiniboia, Fort Qu’Appelle/Moosomin and Prince Albert.


2008 Platinum Award Winners* Lori Hoover, Grant Wildeman, Susan Malakoff, Linda McIntyre, Diane Shambel Grace Thauberger, Joel Robertson, Ann Chaisson, Carrie Lumsden-Bitternose, Jason Box

At Conexus we take pride in the contributions of staff and sales professionals. Our rewards and recognition program known as Reach for the Stars is an opportunity to show appreciation for hard work and dedication. For 2008 we are pleased to recognize ten outstanding individuals with Platinum Awards. Platinum Award recipients epitomize excellence. Their actions indicate an unsurpassed dedication to personal excellence.

2008 Volunteer Award Winners Coralie Ylioja, Dan Kirby, Sharon Bergerman, Irene Solmes, Judy Gibson

The program was expanded in 2008 to recognize the efforts of employees whose volunteer efforts have contributed to the well being of their community. Five outstanding volunteers were selected in this category.

Please join us in congratulating these individuals. Did you know you can nominate a Conexus employee? Visit your local branch to learn more.


* See Experience magazine (Vol. 8 No. 1) at www.conexus.ca to learn more about our Platinum Award Winners along with their locations.


The increasingly complex dynamics of the financial services industry became even more evident during 2008 as global financial uncertainty became a daily topic for discussion. We are extremely pleased to present the enclosed financial statements which indicate the financial success and stability of Conexus.

On behalf of the Conexus Executive team, I would like to thank our Board, staff and sales professionals for their continuing commitment and dedication. We take great pride in our people and the success of the past year would not have been possible without the energy and contribution of the entire Conexus team.

Above all, to our members, customers and clients, your loyalty and willingness to share your business and your voice is invaluable. We will always strive to earn, maintain and strengthen the trust you have placed in us.

Ross McClelland, CEO Conexus Credit Union

Message from the CEO


Chad BoykoEVP Governance/ERM

Adrian LeginEVP Retail Operations

Gayle JohnsonEVP HR, Marketing & Communications

Dale MoleskyEVP Credit Management

Sheryl Britton EVP Technology Services

Ross McClellandChief Executive Officer

Ken ShawEVP Finance

Conexus Credit Union has become one of the most diversified and successful financial institutions in Canada. It gives me great pleasure to report that

Conexus had a very exciting and financially strong year.

Conexus was built from the partnerships of many long-established Saskatchewan credit unions. Our open and innovative approach ensures we will remain focused on improving our products and services that add value to our members, customers, staff and communities.

Through the Conexus Group of Companies, our members and customers have access to more than just traditional credit union financial services. We also offer real estate, wealth management, trust, mortgage brokerage and insurance brokerage services.

Conexus continues to be recognized and rewarded for being an exceptional company. Among other accolades, we were honoured to be named as one of Saskatchewan’s Top 100 Companies, one of the 50 Best Employers in Canada and one of Saskatchewan’s Best 15 Employers. In addition we stand out across Saskatchewan for our financial and volunteer commitments to the communities we serve.


Management Discussion and Analysis – Financial Review


Chad BoykoEVP Governance/ERM

Our Business Environment

The 2008 business environment was overshadowed by the U.S. sub-prime mortgage crisis which caused widespread deterioration of global financial markets.

The economic and financial woes in the U.S. proved to have considerable impact on the global economy resulting in evidence of slowed economic growth around the world.

In 2008, the U.S. economic recession became official and was plagued by falling home prices, major job losses in a number of sectors, decreased consumer spending and poor business investment. The ailing U.S. financial industry led to decreased availability of credit in the U.S. and abroad. The cost of funds for financial institutions including Canadian institutions increased globally and in turn, the cost of borrowings for many corporations increased.

As a result of the problems in the U.S. economy, the Canadian economy experienced a significant economic slowdown in 2008. Real GDP contracted in quarter one by 0.6% and only realized modest growth in quarter two of 0.6% and quarter three of 1.3% before declining again in quarter four by 3.4%. In comparison, real GDP averaged 2.7% in 2007. By the end of 2008 the Canadian domestic economy slowed sharply after an extended period of strength. Unemployment climbed to 6.4% from 5.9% and housing starts were down 4%. Commodity prices fell in 2008 after an unprecedented surge just prior to 2008 as world demand for these resources cooled. Alongside the declines in demand and price for commodities, the resource heavy TSX fell in 2008 as did the value of the Canadian dollar. The credit crunch necessitated massive government interventions to restore liquidity, the flow of credit and shore up faltering financial intuitions. In an effort to stave off the effect of the financial crisis on Canada, the Bank of Canada introduced a number of measures in 2008. The most notable of these measures was that the Bank of Canada cut its overnight rate by 2.75% over the course of the year.

Despite a faltering global economy and a slowing Canadian economy, the province of Saskatchewan managed to continue its strong economic performance in 2008. Saskatchewan led all provinces in growth in 2008 and employment in the province continued to hit record highs increasing 3.4% year over year. Saskatchewan ended

the year with the lowest unemployment rate in the country at 4.0% in December 2008 (3.8% in December 2007). Most parts of the Saskatchewan economy posted strong results and growth in 2008 including farm cash receipts, oil production, manufacturing shipments, capital investments in Saskatchewan, motor vehicle sales and international exports.

Conexus is a community credit union that serves the residents and businesses of Saskatchewan. Therefore, unlike banking institutions across the globe, Conexus’ financial position or earnings were not materially affected in 2008 by the financial and economic events. However, higher bank funding costs increased the competition and cost for deposits. The financial market turmoil also impacted the securitization market which remained at a standstill throughout 2008. This restricted the Credit Union’s access to funds from the capital markets. Consequently, most of the Credit Union’s loan growth was retained and funded through deposits.

Looking ahead, the effects of the global economic downturn will not pass quickly. However, the Canadian economy is expected to fair better than most industrialized nations with some challenges expected with exports and relatively modest growth in domestic demand. At the provincial level, economic forecasters are expecting a further, albeit modest, expansion of Saskatchewan’s economy for 2009. On average, Saskatchewan is forecasted to experience positive real GDP growth of 2.2% in 2009 and this is expected to be the highest growth rate among the provinces.

Currently Canada, and in particular Saskatchewan, is performing relatively well and despite the expected economic trends, is only experiencing a moderate decline in the domestic economy. As with all economic trends the slowed economy is likely cyclical and will eventually pass. Conexus is in a sound position and has been left mostly untouched by the market conditions that are affecting some other financial institutions. The economic performance in Canada and Saskatchewan, though relatively strong, will remain tempered until the U.S. economy recovers, which is expected in late 2009 or 2010.


Performance Measurement

Disciplined measurement of our performance is important to our long-term success. Conexus uses a balanced scorecard framework to establish, measure and monitor our progress toward achieving our business strategy, mission and vision. Our business strategy is characterized by four strategic themes: customer, member and

community value; internal and operational effectiveness; employee and employer of choice; and financially strong.

In 2008 we made progress in all four areas.


Overall, Conexus met 95% of its balanced scorecard targets in 2008. Key performance measures met include volunteer hours; average absenteeism hours; training and development credit hours; and return on assets (ROA). Conexus is dedicated to the communities where we live and work: Conexus staff and sales professionals volunteered for a total of 36.76 hours per person, well over the 24 hours per person target. Conexus is also committed to the development of its employees. Training and development credit hours per person reached 51.82 hours which is more than double the target of 24 hours. Return on Assets this year was 1.48% compared to the target of 1.10%. This large variance is due to Conexus posting a very strong net income for 2008 that was well above budgeted net income.

Our 2008 Balanced Scorecard Approach - Conexus uses a balanced approach to ensure we successfully deliver on our strategies. Our Balanced Scorecard outlines our objectives, initiatives and measures for 2008. Performance Measures in each category are weighted to indicate their relative impact on overall company success, hence the name “Balanced Scorecard”.

Actual TargetPerformance MeasuresStrategic Themes


2008 Financial Performance Review

The following provides a review of our enterprise financial performance for 2008 and focuses on the consolidated financial statements.

GrowthOn-balance sheet assets at the end of 2008 were $2.9 billion compared to $2.6 billion in 2007 representing growth of 11.39%. Other funds under management include: $401 million in wealth management and $397 million in securitized and syndicated loans. This brings total funds managed to $3.67 billion up from $3.44 billion in 2007. Total growth of 6.62% was achieved.

Total loans increased from $2.2 billion in the prior year to $2.4 billion in 2008, or 8.92% loan growth. Member deposits outpaced loan growth increasing from $2.3 billion in 2007 to $2.6 billion in 2008 or an annual growth rate of 11.25%.

Conexus’ loan book continues to be comprised largely of stable, low risk, consumer mortgage loans (33% of the total loan portfolio). The province experienced economic growth in 2008 leading to Conexus increasing its total commercial loan allocation in 2008 (commercial mortgage and non-mortgage loans); increasing modestly from 39% in 2007 to 40% in 2008. Loan allocation to the agriculture sector decreased modestly as agriculture mortgages and non-mortgage loans decreased to 12% in 2008 as compared to 13% in the prior year .

6%6%

33%

15%

26%

14%

2008 Loan Portfolio(percent of total loans)

Ag Mortgage Ag Non - Mortgage

Consumer Mortgage Consumer Non - Mortgage

Commercial Mortgage Commercial Non - Mortgage


7%6%

31%

17%

25%

14%

2007 Loan Portfolio(percent of total loans)

Ag Mortgage Ag Non - Mortgage

Consumer Mortgage Consumer Non - Mortgage

Commercial Mortgage Commercial Non - Mortgage

Conexus Assets

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$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

2006 2007 2008

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LiquidityDespite the market turmoil which created tight liquidity and credit conditions among financial service providers, Conexus’ liquidity, as measured by the loan to asset ratio, improved in 2008. In 2006 the ratio was 83.74%, in 2007 it increased to 84.32%, and in 2008 it was 82.44%. Targeted deposit growth and increased allocation to liquid investments led to an overall improved liquidity position. The demand for loans has continued to be funded primarily by deposits from Conexus members and customers. These deposits are 100% guaranteed by the regulator of credit unions in Saskatchewan, Credit Union Deposit Guarantee Corporation (CUDGC).

As an added measure of safety, Saskatchewan credit unions are required to maintain 10% of their liabilities on deposit with Credit Union Central of Saskatchewan (SaskCentral) who manages the Provincial Liquidity Program. Throughout 2008, Conexus held the required amount of investments with SaskCentral for the purpose of maintaining its obligation to the Provincial Liquidity Program. Among other reasons, these liquidity investments provide a safety net of liquid resources to satisfy payment obligations and protect against unforeseen liquidity events. In addition to the statutory liquidity investments on deposit with SaskCentral, Conexus maintains a stock of liquid assets, as well as access to borrowings to meet daily and medium-term liquidity requirements.

ProfitabilityIncome before tax and patronage allocation for the year was $42.4 million, an increase from $30.8 million over the prior year.

For 2008 our total annualized return on assets (ROA) before patronage allocation and income tax was 1.48% compared to 1.20% in 2007.

Net Interest Margin – is total interest revenue less total interest expenses while factoring in any provisions for credit and investment losses. For 2008, net interest margin was 3.19% compared to 3.04% in 2007. Declining interest rates resulted in an overall lower yield on loans while rates on deposits stayed relatively elevated. However, net interest margin increased compared to last year as the Credit Union experienced lower loan loss provisions, larger investment interest revenue and positive gains related to market valuation within its investment and derivative portfolios. Non-Interest Revenue – includes fixed asset revenue, commissions and charges and loan recoveries. Non-interest revenue increased from $64 million in 2007 to $67 million in 2008. The primary source of growth was securitized and syndicated loan revenue.

Non-Interest Expense – includes various operating costs such as personnel, occupancy, security, governance, community development and general business. Non-interest expense increased slightly from 4.49% of assets or $115.7 million in 2007 to 4.25% of assets or $121.8 million in 2008. The largest increase was in personnel costs.

Efficiency – We continued to make progress in 2008 towards improving efficiency (non-interest operating expenses as a percentage of revenue). The efficiency ratio improved slightly from the prior year, decreasing to 73.13% from 73.83% in 2007.


(in

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Net Income

$-

$5,000

$10,000

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$25,000

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$35,000

2006 2007 2008


EquityTotal capital as a percentage of risk weighted assets and total capital as a percentage of total assets (capital adequacy) is one of our primary measures of financial strength. Our capital management framework is designed to maintain an optimal level of capital. Accordingly, our capital policies are designed to ensure that: we meet our regulatory capital requirements; we meet our internal assessment of required capital; and we build long-term membership value. Conexus retains a portion of its annual earnings in order to meet these capital objectives. Once these capital objectives are met, additional earnings are allocated to members through our patronage program. The patronage program allocates earnings to members’ equity accounts based on usage of services.

Capital adequacy for Saskatchewan credit unions is set and measured in accordance to guidelines issued by the regulator, Credit Union Deposit Guarantee Corporation. The guideline requires that a credit union maintain a minimum of 8% of total capital as a percentage of risk weighted assets. For the year-ending 2008, our total capital as a percentage of risk weighted assets was 10.46%. Conexus experienced strong capital growth in 2008, adding to its sound financial position. In 2008 the capital of Conexus increased by $32.7 million from $191.9 million in 2007 to $224.6 million in 2008. Total capital (equity) of Conexus consists of: amounts held in member equity accounts as per the patronage program ($19.2 million in 2008); membership shares ($0.6 million in 2008); and retained earnings ($204.8 million in 2008). The following illustrates the capital composition of Conexus from 2006 through 2008. As the chart illustrates, retained earnings remains the key source of capital for Conexus.


Conexus Capital

$-

$50,000

$100,000

$150,000

$200,000

$250,000

2006 2007 2008

(in 0

00's)

Member Equity Member Shares Retained Earnings


In 2008, Conexus allocated $6.06 million of earnings to members through the patronage program ($4.38 in 2007). Members, in accordance with the patronage program, will receive $3.6 million of the patronage allocation as a cash distribution; with the balance going to members’ equity accounts.

Credit Quality Ensuring delinquency greater than 90 days does not exceed 1.50% of the loan portfolio is one of our key risk management standards. In 2008 the quality of Conexus’ loan portfolio was again proven through achievement of a 1.41% level of delinquency greater than 90 days. A small number of loans caused this measurement to increase from 2007 (0.76%) however it is still within the targeted quality standard of 1.50%.

The loan portfolio is continuously monitored to identify potential credit losses. Guided by this monitoring, management maintains both specific and general loan allowances. Specific allowances are reviewed regularly by examining the individual loans and estimating the likelihood of realizing the full carrying value. General allowances are calculated using management’s judgment while considering current economic conditions and historical credit losses.

Specific loan allowances at 2008 year end were 0.71% of total assets compared to 0.48% in 2007. However, overall loan loss provisions (general and specific loan provisions combined as a percentage of total assets) were 0.19% in 2008, down from 0.38% in 2007, a favorable improvement of 0.19%.


$-

$1,000

$2,000

$3,000

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$5,000

$6,000

$7,000

2006 2007 2008

(in 0

00's

)Conexus Patronage Allocations


Management of Risk

As a financial institution, Conexus is exposed to a variety of risks. An enterprise-wide risk management approach is used for the identification, measurement,

and monitoring of risks.

The Board’s oversight of risk management includes:

The Board of Directors (Board) – is responsible for approving the overall business strategies and significant policies of Conexus and understanding and setting acceptable levels of risk for the organization.

The Audit and Risk Committee – monitors the major risks of Conexus and reviews and recommends acceptable levels for these major risks to the Board. The committee also reviews the appropriateness of risk management processes and procedures implemented by management. The committee provides oversight of the external and internal audit functions including ensuring the adequacy of internal controls.

Executive Management – is responsible for implementing strategies and policies approved by the Board and for developing processes that identify, measure, monitor and control risks. Management reports to the Board on risk management performance on a regular basis. Established management committees include:

Asset/Liability Management Committee – is composed of executive and senior management of Conexus. The committee is responsible for understanding and monitoring liquidity risk, interest rate risk and overall credit exposure. The committee ensures balance sheet activities and measures are within acceptable limits including, but not necessarily limited to, capital adequacy; lending and investment limits; liquidity risk; and interest rate risk. Furthermore, the committee sets and approves balance sheet operational strategies with a focus on achieving financial targets, managing market and liquidity risk and optimizing the use of capital.

Enterprise Risk Management Committee – is composed of executive management. The committee meets at least once per year to review the internal and external environment and identify, analyze and assess the key risks that may impact the achievement of strategic objectives.

In addition to these management committees, there are several business units that are also responsible for managing risks within their respective area of authority. In addition, separate divisions provide independent control and/or assurance as to soundness of operations.

• Governance and Risk Management – oversees enterprise-wide management of risk and compliance throughout the organization.

• Internal Audit – provides independent and objective assurance of control and soundness of operations to management and the Audit and Risk Committee of the board.

• Credit Management - controls the adjudicaton, management and monitoring of our organization’s credit risk; establishes operating credit policies and procedures for loan origination; and applies credit management techniques and models to manage the credit portfolio.

• Treasury and Finance - controls asset/liability management, liquidity management and

capital management to ensure our organization is financially strong.

Risk Categories

Credit RiskAt Conexus, credit risk comes primarily from our direct lending activities and, to a lesser extent, our holdings of investment securities. Credit risk is the risk of financial loss arising from a borrower or counterparty’s inability to meet its obligations.

Lending and credit risk management is performed in accordance with documented policies, standards and controls. Risk concentration limits have been designed to reflect our risk tolerance. Other risk mitigation efforts include in-depth training of loans personnel, independent adjudication of higher risk loan applications and regular monitoring and reporting.

Market RiskMarket risk is the risk that the financial position or earnings will be adversely affected by changes in market conditions such as, interest rates and foreign exchange rates. Conexus’ market risk primarily arises from movements in interest rates, specifically from timing differences in the re-pricing of loans and deposits, both on-balance sheet and off-balance sheet.

Conexus employs comprehensive management processes around our market exposures and risk taking activities. These include:

• Well-defined market risk exposure limits, measuring and monitoring processes and reporting.

• Management reporting to the board, at least quarterly, with respect to market risk exposure and management strategies.

• Providing oversight of market risk within the Asset/Liability Management Committee.

• Scenario and stress testing based on changes in interest rates.



Liquidity RiskLiquidity risk arises from general funding activities and in the course of managing assets and liabilities. It is the risk of having insufficient cash resources or equivalents to meet financial obligations without having to raise funds at unfavorable rates or selling assets on a forced basis. At Conexus liquidity risk management strategies seek to maintain sufficient liquid resources to continually fund our on-balance sheet and off-balance sheet commitments.

Policies, standards and limits that define the liquidity risk management requirements are established through board approved corporate polices. The Asset/Liability Management Committee and the Treasury and Finance department oversee liquidity risk exposure and management. The funding and liquidity risk management framework includes the following processes and controls:

• Conexus monitors actual and anticipated inflows and outflows of funds generated from on-balance sheet and off-balance sheet activities on a daily basis. Actual and forecasted liquidity position is reported weekly to executive management and monthly to the Asset/Liability Management Committee.

• Conexus conducts scenario testing to assess the adequacy of liquidity under both normal operating conditions and under stress conditions including liquidity events.

• Conexus maintains liquidity contingency plans.• Conexus actively manages liquidity and funding risk by

holding a stock of liquid assets.• Conexus has established borrowing facilities with

SaskCentral and its affiliate, Concentra Financial Services Association.

• Conexus has established asset sale programs with both the capital markets and credit union partners. Due to market conditions asset securitizations through the capital markets are not currently available.

Strategic RiskStrategic risk is the risk that adverse decisions or ineffective plans will impact the ability of Conexus to meet business objectives.

Conexus has formal planning processes which result in a Strategic Business Plan and Balanced Scorecard that focus on strategic objectives such as providing professional, personal and caring service.

Operational RiskOperational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or external events. Exposures to this risk arise from deficiencies in internal controls, technology failures, human error or natural disasters.

Operational risk is managed through the use of policies and procedures, controls and monitoring. Control and monitoring involves segregation of duties, employee training, performance management and a structured internal audit program. Other mitigation includes business continuity planning, appropriate insurance coverage and secure technology solutions.

Legal and Regulatory RiskLegal and regulatory risk arises from potential violations of, or non-conformance with laws, rules, regulations or ethical standards.

Conexus operates in a heavily regulated environment. Structure, policies and procedures are designed to ensure compliance. A separate corporate compliance department is in place to manage and report on legal and regulatory risk on a regular basis.

This Management Discussion and Analysis may contain forward-looking statements concerning Conexus future strategies. These statements involve uncertainties in relation to prevailing economic, legislative and regulatory conditions at the time of writing.

Therefore, actual results may differ from the forward-looking statements contained in this discussion.



Annual ReportCONEXUS CREDIT UNION 2006Auditors’ Report and Consolidated Financial StatementsDecember 31, 2008


Photo: Youth Access Program sponsorship, Prince Albert


Management’s Responsibility Communication

To the Members ofConexus Credit Union 2006

Management has responsibility for preparing the accompanying consolidated financial statements and ensuring that all information in the annual report is consistent with the statements. This responsibility includes selecting appropriate accounting principles and making objective judgements and estimates in accordance with Canadian generally accepted accounting principles.

Ultimate responsibility for consolidated financial statements to members lies with the Board of Directors. An Audit/Risk Committee of Directors is appointed by the Board to review consolidated financial statements in detail with management and to report to the Board of Directors prior to their approval of the consolidated financial statements for publication.

R. McClellandChief Executive Officer

K. ShawExecutive Vice PresidentFinance

In discharging its responsibilities for the integrity and fairness of the consolidated financial statements management designs and maintains the necessary and related accounting systems and related system of internal controls to provide assurance that transactions are authorized, assets are safeguarded and proper records are maintained.

External auditors are appointed by the members to audit the consolidated financial statements and report directly to the members. Their report is presented separately. The auditors have full and free access to, and meet periodically and separately with, both the Audit/Risk Committee and management to discuss their audit findings.

statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Credit Union as at December 31, 2008 and the results of its operations and its cash flows for the year then ended in accordance with Canadian generally accepted accounting principles.

January 30, 2009Regina, Saskatchewan Chartered Accountants

Auditors’ Report

To the Members ofConexus Credit Union 2006

We have audited the consolidated statement of financial position of Conexus Credit Union 2006 as at December 31, 2008 and the consolidated statements of income and comprehensive income, members’ equity and cash flows for the year then ended. These financial statements are the responsibility of the Credit Union’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial


APPROVED BY THE BOARD:

Norbert Fries, Director Ed Gebert, Director

CONSOLIDATED STATEMENT OF FINANCIAL POSITION(in thousands)As at December 31, 2008

2008 2007

Assets

Cash $ 26,008 $ 36,399Investments (Note 3) 404,289 303,703Loans receivable (Note 4) 2,368,017 2,174,033Other assets (Note 7) 33,834 30,421Property and equipment (Note 8) 37,882 32,015

$ 2,870,030 $ 2,576,571

Liabilities

Deposits $ 2,604,516 $ 2,342,384Loans payable (Note 9) 2,501 –Other liabilities (Note 10) 38,399 42,288Shares and equity accounts (Note 11) 19,804 18,004

2,665,220 2,402,676

Members’ Equity

Retained earnings 204,810 173,895Accumulated other comprehensive income – –

$ 2,870,030 $ 2,576,571Commitments and guarantees (Note 17)See Accompanying Notes


2008 2007

Interest revenue

Loan $ 136,158 $ 135,508Investment 30,187 18,315

166,345 153,823

Interest expense

Borrowed money 208 1,957Member deposits 63,016 59,442Patronage allocation 6,065 4,375

69,289 65,774Net interest income before provision for credit losses 97,056 88,049Provision for credit losses (Note 4) 5,518 9,823Net interest income after provision for credit losses 91,538 78,226

Other income 66,644 63,927

Operating expenses

General business 52,285 53,981Occupancy 7,831 7,482Organizational 2,329 2,312Personnel 57,522 50,904Security 1,871 1,050

121,838 115,729

Income before income taxes 36,344 26,424Income taxes 5,429 4,597

Net income $ 30,915 $ 21,827Other comprehensive income (net of taxes) – –Total comprehensive income $ 30,915 $ 21,827See Accompanying Notes

CONSOLIDATED STATEMENT OF INCOME AND COMPREHENSIVE INCOME(in thousands)For the year ended December 31, 2008


2008 2007

Retained earnings – beginning of year $ 173,895 $ 153,946

Transition adjustment – (1,878)Net income 30,915 21,827

Retained earnings – end of year $ 204,810 $ 173,895

Accumulated other comprehensive income - beginning of year – –Other comprehensive income – –

Accumulated other comprehensive income – end of year – –See Accompanying Notes

CONSOLIDATED STATEMENT OF MEMBERS’ EQUITY(in thousands)For the year ended December 31, 2008


2008 2007

Cash provided by (used in) operating activities:

Net income $ 30,915 $ 21,827Items not involving cash:Amortization 4,145 3,891Gain on sale of investments 9 (22)Charge for asset impairment 4,924 9,916Future income taxes (152) (2,086)

Net change in other assets and other liabilities (7,197) (8,198)32,644 25,328

Cash provided by (used in) financing activities:

Increase in member deposits, shares 263,932 279,129Patronage retained – –Loans payable 2,501 –

266,433 279,129

Cash provided by (used in) investing activities:

Increase in investments (100,586) (23,566)Increase in loans (198,908) (271,685)Purchase of capital assets (9,974) (8,570)

(309,468) (303,821)

Increase (decrease) in cash during the year (10,391) 636Cash position – beginning of year 36,399 35,763

Cash position – end of year $ 26,008 $ 36,399

Cash used for:

Interest $ 62,186 $ 57,512Income taxes $ 7,846 $ 10,056

See Accompanying Notes

CONSOLIDATED STATEMENT OF CASH FLOWS(in thousands)For the year ended December 31, 2008


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS(in thousands)For the year ended December 31, 2008

1. INCORPORATION AND GOVERNING LEGISLATION

Conexus Credit Union 2006 (the Credit Union), was established and continued pursuant to The Credit Union Act, 1998 of the Province of Saskatchewan. The Credit Union serves members and non-members in the Province of Saskatchewan with the Head Office located in Regina. Credit Union Deposit Guarantee Corporation (CUDGC), a corporation established in provincial legislation, guarantees the full repayment of all deposits held with Saskatchewan credit unions. The Credit Union Act, 1998, provides the deposit guarantee and the authority for CUDGC to regulate Saskatchewan credit unions.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These consolidated financial statements have been prepared in accordance with the applicable governing legislation for each entity, which conform in all material respects to Canadian generally accepted accounting principles (GAAP). The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Actual results could differ from those estimates. The significant accounting policies adopted by the Credit Union include:

Basis of consolidation The consolidated financial statements contain the assets, liabilities, income and expenses of subsidiaries after eliminating

inter-company transactions and balances. Investments in which the Credit Union does not control, but has a significant interest, are accounted for using the equity method.

Included in the consolidated financial statements are the following entities:

Subsidiaries

The Credit Union has 100% interest in CENTURY 21 Conexus Realty Ltd., CENTUM Canada Mortgage Direct Ltd., Conexus Insurance Ltd. and Protexus Holdings Corp.

Significant interest investments The Credit Union has a 40% ownership in CU Dealer Finance Corp. and a 33.33% ownership in APEX Investment

Group.

Significant accounting changes On January 1, 2008, the Credit Union adopted new accounting standards that were issued by the Canadian Institute

of Chartered Accountants (CICA): Section 1535, Capital Disclosure, and replacing Section 3861 with Sections 3862 and 3863, Financial Instruments – Disclosure and Presentation. These standards impact the disclosure the Credit Union provides but do not affect the Credit Union’s Consolidated Statement of Financial Position or Income.

Capital disclosures Section 1535 requires the Credit Union to disclose qualitative and quantitative information to enable financial statement

users to evaluate the objectives, policies and processes used by the Credit Union to manage capital. As a result of adopting this new standard a new disclosure is provided in Note 12 Capital management.

Financial instruments disclosures and presentation Section 3862 and 3863 require the Credit Union to place increased emphasis on disclosures about the nature and extent

of risks occurring from financial instruments and how the Credit Union manages those risks. As a result of adopting these new standards, new or enhanced disclosures are provided in Note 4 Loans receivable, Note 5 Impaired and past due loans, Note 15 Fair value of financial instruments, and Note 16 Nature and extent of risks arising from financial instruments.


Reclassification of certain held for trading financial assets Section 3855, Financial Instruments - Recognition and Measurement was amended in October of 2008 and permits the

reclassification of certain held for trading financial assets under rare circumstances. If a financial asset is reclassified from held for trading, it must be classified as held to maturity, available for sale or as loans and receivables. The reclassification can be made retrospectively for any date back to July 1, 2008. The Credit Union did not choose to reclassify any of its financial assets in 2008.

Classification and measurement of financial instruments The accounting standards for financial instruments require that all financial assets and liabilities be classified according

to their characteristics, management intentions or the choice of category in certain circumstances. Financial assets can be classified as held for trading, held to maturity, available for sale, or as loans and receivables. Financial liabilities must be classified as other or held for trading. Upon initial recognition, all financial assets and liabilities are recorded at fair value on the Consolidated Statement of Financial Position. In subsequent periods, financial assets and liabilities held for trading are measured at fair value with gains and losses recognized in net income. Financial assets held to maturity, loans and receivables, and financial liabilities, other than those held for trading, are measured at amortized cost. Available for sale instruments are measured at fair value with unrealized gains and losses recognized in other comprehensive income.

Although the standard allows any financial instrument to be irrevocably designated as held for trading, CUDGC, the Credit Union’s regulator, has issued guidelines limiting the circumstances under which this option may be used. The Credit Union may use this option providing that: management of these financial instruments is in accordance with a documented risk management strategy and if the fair values are reliable.

Fair value is the amount at which a financial instrument could be exchanged with unrelated parties in an open market. When a financial instrument is initially recognized, its fair value is generally the value of the consideration paid or received. Primarily, fair values are based on quoted market prices; if a financial instrument’s market is unavailable, fair values are established using valuation techniques that rely on observable market data.

Cash Cash consists of cash and cash equivalents maturing in one business day. Cash is classified as held for trading. Due to its

short-term nature, the recorded amount of cash and cash equivalents is considered to be the fair value.

Investments Investments held for trading purposes are recorded at fair value. Fair value is determined by quoted market prices

obtained from third party sources when available.

Investments held to maturity are financial assets the Credit Union has the intention and ability to hold to maturity. These investments are measured at amortized cost, unless there is a permanent decline in value, in which case they would be measured at net realizable value. No investments are currently classified as held to maturity.

Investments that are not classified as held for trading, or held to maturity, are classified as available for sale and measured at fair value. If the investment is an equity instrument with no quoted market price, or if fair value cannot reliably be determined, the investment is recorded at cost.



Loans receivable Loans are classified as loans and receivables and are recorded at outstanding principal plus accrued interest. Reported

amounts are measured at amortized cost using the effective interest rate method.

Foreclosed assets held for resale are initially recorded at the lower of the investment recorded in the foreclosed loan and its net realizable value. Foreclosed assets held for resale are subsequently recorded at the lower of carrying value or fair value less costs to sell.

An allowance for impaired (doubtful) loans is maintained to reduce the carrying value of loans and foreclosed assets held for resale. A loan is classified as impaired (doubtful) when there is no longer reasonable assurance that the principal and interest will be collected in full. Foreclosed assets are considered to be assets held in the course of realization of impaired loans. The allowance is comprised of two components - specific allowances and general allowances, calculated as follows:

(i) The Credit Union records specific allowances based on management’s regular review of individual loans. The estimated realizable amount represents management’s best estimate of the value of future payments it will receive on each loan, discounted at the loan’s effective contractual interest rate. When management cannot reasonably determine the loan’s future cash flows, it bases its estimates on the current market value of the loan’s security net of expected selling costs.

(ii) The Credit Union records general allowances for certain groups of loans with similar characteristics, which are exposed to common impairment factors. A general allowance is determined based upon management’s judgement considering business and economic conditions, portfolio composition, historical credit performance and other relevant indicators. The change in the net realizable value of these assets is recorded as a charge or credit for loan impairment.

Asset securitization The Credit Union securitizes groups of assets by selling them to an independent special purpose or qualifying special

purpose entity or trust. Such transactions create liquidity for the Credit Union and release capital for future needs. Securitization transactions are recognized as a sale and the assets are removed from the Consolidated Statement of Financial Position when the Credit Union has surrendered control over the assets and has received, in exchange, consideration other than beneficial interests in the transferred assets. For the surrender of control to occur, the transferred loans must be isolated from the Credit Union, the Credit Union does not maintain effective control over the transferred assets, and the purchaser must have a legal right to sell or pledge the transferred loans.

The Credit Union generally retains an interest in the securitized assets such as servicing rights, and various forms of recourse including over-collateralization, rights to excess spread, and cash reserve accounts. The over-collateralization and cash reserve components of the Credit Unions retained interest are classified as available for sale securities on the Consolidated Statement of Financial Position and recorded at cost. As market prices are not available for these components of retained interest and fair value cannot be measured reliably, the Credit Union has selected cost as the most appropriate measure.

Gains and losses on retained interest, other than over collateralization and cash reserve accounts, are recognized in non-interest income on the date of the transaction. These gains and losses are dependant in part on the previous carrying amount of the loans involved in the transfer. As market quotes are usually not available, gains and losses are recorded at fair value as determined by estimating the present value of future expected cash flows using estimates of key assumptions on credit losses, prepayment rates, discount rates and cost of funds. Any estimate adjustments to the key assumptions will result in changes to the fair value of gains and losses and are recorded in non-interest income. All loans securitized by the Credit Union have been on a fully serviced basis.



Funds under administration The Credit Union administers and manages assets on behalf of Credential Asset Management Inc., Credential Direct Inc.,

Credential Securities Inc., Credential Financial Strategies Inc., as well as other wealth management funds on behalf of members. Assets under administration are recorded separately from the Credit Union’s assets and are not included in the Consolidated Statement of Financial Position. As at December 31, 2008, funds managed totaled $401 million (2007 - $496 million).

Property and equipment Property and equipment are recorded at cost less accumulated amortization. The cost of property and equipment less estimated

salvage values is amortized over their expected useful life. Amortization is calculated using the straight-line method.

Future income tax Future income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences

between consolidated financial statement carrying amounts and their tax base. These amounts are measured using enacted tax rates and re-measured annually for rate changes. Future income tax assets are recognized for the benefit of deductions available to be carried forward to future periods for tax purposes that are likely to be realized. Future income tax assets are re-assessed each year to determine if a valuation allowance is required. Any effect of the re-measurement or re-assessment is recognized in the period of change. The Credit Union is taxed at an effective rate of 15.5% on taxable earnings eligible for the small business rate and the balance at an effective rate of 32%.

Derivative financial instruments Derivative financial instruments are financial contracts whose values are derived from an underlying interest rate, foreign

exchange rate, equity, commodity instrument or index. In the ordinary course of business, the Credit Union enters into derivative transactions for asset/liability management purposes.

Asset/liability derivatives are used to manage interest rate risk, credit risk and currency exposure. Such derivatives include contracts that reposition the Credit Union’s overall interest rate risk, credit risk and foreign exchange risk profile.

The Credit Union has chosen not to use hedge accounting; therefore, all derivatives are recorded at fair value in the Consolidated Statement of Financial Position with gains and losses recognized as interest on investments in the current period. Derivative financial instruments with a positive fair value are included in assets and derivative financial instruments with a negative fair value are included in liabilities in the Consolidated Statement of Financial Position.

When available, quoted market prices are used to determine the fair value of derivative financial instruments. Otherwise, fair value is determined using pricing models that consider current market prices and the contractual prices of underlying instruments, the time value of money, yield curves, volatility and credit risk factors.

Revenue recognitionLoan revenueLoan interest revenue and loan origination fees are recognized on the accrual basis and measured at amortized cost using the effective interest rate method. Loan interest revenue is not recognized with respect to an impaired loan.

Investment interest revenueInvestment interest revenue is recognized on the accrual basis.

Derivative interest revenue and expenses

Derivative interest revenue and expenses are calculated on an accrual basis at fair value. Investment gains and losses For investments classified as held for trading, increases and decreases in fair values are recorded in net income as unrealized

gains or losses on investments. Realized investment gains and losses are recorded when the related investments are sold. These amounts are grouped with interest revenue.

For investments classified as available for sale, unrealized gains or losses resulting from changes in fair values are recorded in other comprehensive income. Gains and losses on these investments are recognized in net income when sold.

For investments classified as held to maturity, gains or losses on these investments are recognized at the time of sale.



Recovery of principal and interest Recovery of principal and interest on loans written off in prior years is included in revenue when realized.

Fees Fees, other than loan origination fees, are recognized as other revenue in the year the related service is provided. These fees

include annual review fees, payment deferral fees, mortgage prepayment bonus fees, letter of credit fees, small business loans fees and outgoing mortgage transfer fees. Loan origination fees are fees charged at the inception or origination of the loan such as application fees, processing fees, search fees, disbursement fees, renewal fees, credit check fees, registration fees, personal property security registration fees and amendment fees. These fees are grouped with the related loans receivable and amortized using the effective interest method.

Transaction costs Transaction costs relating to assets classified as loans and receivables are accounted for in accordance with the fees policy above. Transaction costs relating to available for sale assets, held for trading assets or liabilities and other liabilities are recorded as

revenue or expenses in the Consolidated Statement of Income as they are incurred. Transaction costs relating to held to maturity assets are included in the determination of amortized cost using the effective interest method.

Other income Other revenue is recognized in the fiscal period in which the related service is provided. Lease revenue is recognized over the

term of the related lease.


3. INVESTMENTS

The Credit Union’s investments are recognized in the Consolidated Statement of Financial Position in accordance with financial instrument designation categories. The recorded values of investments by category are presented in the table below:

The regulator Credit Union Deposit Guarantee Corporation (CUDGC) requires that the Credit Union include 10% of their total liabilities in specified liquidity deposits in Credit Union Central of Saskatchewan (SaskCentral) as set out in regulation (18 - 1). As of December 31, 2008, the Credit Union met the requirement.

Investments Available for Sale 2008 2007

CostAccumulated Other

Comprehensive IncomeRecorded

ValueRecorded

Value

SaskCentral shares $ 21,508 $ - $ 21,508 $ 17,257SaskCentral debenture 4,740 - 4,740 4,740

Securitization retained interest 20,158 - 20,158 23,654

Other 361 - 361 365Total $ 46,767 $ - $ 46,767 $ 46,016

Investments Held for Trading 2008 2007

CostFair Value

AdjustmentFair

ValueFair

Value

Concentra Financial $ 18,000 - $ 18,000 $ 6,372Federal and provincial government 14,276 92 14,368 4,958Other 60,620 (68) 60,552 11,360SaskCentral - liquidity 255,046 4,761 259,807 232,082

Total $ 347,942 $ 4,785 $ 352,727 $ 254,772

Significant interest investments 374 597Accrued interest 4,455 2,352Allowance for impaired investments (34) (34)Total investments $ 404,289 $ 303,703



4. LOANS RECEIVABLE

The Credit Union’s outstanding loans by portfolio type are as follows:

Loans by Portfolio 2008 2007

Performing Impaired Specific Allowance Net Net

Consumer LoansMortgage guaranteed $ 436,690 $ – $ – $ 436,690 $ 401,332Mortgage conventional 344,392 271 (1) 344,662 268,598Non-mortgage 363,272 1,097 (825) 363,544 367,825

Total consumer loans 1,144,354 1,368 (826) 1,144,896 1,037,755

Commercial LoansMortgage 599,883 13,547 (5,042) 608,388 548,753Non-mortgage 305,729 13,915 (12,056) 307,588 289,093Government guaranteed 14,131 206 (96) 14,241 15,848

Total commercial loans 919,743 27,668 (17,194) 930,217 853,694

Agricultural Loans

Mortgage 141,346 433 (167) 141,612 149,386

Non-mortgage 119,752 1,748 (2,097) 119,403 104,221

Government guaranteed 18,942 32 (6) 18,968 18,675

Total agricultural loans 280,040 2,213 (2,270) 279,983 272,282

Foreclosed property held for resale 2,205 – – 2,205 1,329

Accrued interest receivable 11,532 1,870 – 13,402 13,102

General allowance for credit losses (2,686) – – (2,686) (4,129)

Total loans $ 2,355,188 $ 33,119 $ (20,290) $ 2,368,017 $ 2,174,033

Allowance for Credit Losses 2008 2007

Specific Allowance General Allowance Total Total

Balance - beginning of year $ 12,513 $ 4,529 $ 17,042 $ 9,292Charge for credit losses 7,361 (1,843) 5,518 9,823

Interest accrued during year on impaired loans 2,391 – 2,391 1,714Loans written off (1,975) – (1,975) (3,787)Balance - end of year $ 20,290 $ 2,686 $ 22,976 $ 17,042


5. IMPAIRED AND PAST DUE LOANS

Outstanding impaired loans, net of allowance for credit losses, by loan portfolio type, are as follows:

Outstanding Impaired Loans 2008 2007

Impaired Loans Specific AllowanceNet Impaired

LoansNet Impaired

Loans

Consumer $ 1,368 $ (826) $ 542 $ 764Commercial 27,668 (17,194) 10,474 7,470Agricultural 2, 213 (2,270) (57) 1,136Total 31,249 (20,290) $ 10,959 $ 9,370Foreclosed property held for resale 2,205 1,329General allowance (2,686) (4,129)Net impaired loans after allowance $ 10,478 $ 6,570


Net impaired loans exclude certain past due loans where payment of interest or principal is contractually in arrears but where payment in full is expected. Details of such past due loans (delinquencies) not included in the impaired amount are as follows:

Past Due Loans 2008 2007

1-30 days 31-90 daysMore than

90 days Total Total

Consumer $ 11,241 $ 2,453 $ 2,813 $ 16,507 $ 18,962Commercial 15,039 9,923 25,254 50,216 12,085Agricultural 3, 746 2,916 3,564 10,226 13,258Total delinquency $ 30,026 $ 15,292 $ 31,631 $ 76,949 $ 44,305


6. SECURITIZATION The Credit Union has sold an amortizing ownership interest in various qualifying commercial mortgage receivables and residen-

tial mortgage receivables to a qualifying special purpose trust and a multi-seller special purpose trust, respectively. On a monthly basis, principle and interest collections attributable to the specific trusts are forwarded to the trusts. The Credit Union’s retained interest in the transferred portfolios consists of various credit enhancements and excess spread. The Credit Union retains the responsibility for servicing the qualifying commercial mortgage receivables and qualifying residential mortgage receivables.

The Credit Union has sold a revolving ownership interest in the auto loan receivable portfolio to a qualifying special purpose trust. On a monthly basis, principle collections attributable to the qualifying special purpose trust are reinvested to maintain the qualify-ing special purpose trust ownership interest at $141.7 million. Gains or losses from subsequent reinvestment of principle collec-tions are included in non-interest income from securitized assets. The Credit Union’s retained interest in the transferred portfolio consists of various credit enhancements and excess spread. The Credit Union retains the responsibility for servicing the auto loan receivables.

The following table summarizes the impact of securitizations on the Credit Union’s Consolidated Statement of Income:


2008 2007

Residential Mortgages

Commercial Mortgages

AutoLoans



AutoLoans

Gain (loss) on retained interest $ 344 ($ 261) $ 7,178 ($ 223) ($ 468) $ 1,996Total $ 344 ($ 261) $ 7,168 ($ 223) ($ 468) $ 1,996

The following table contains key assumptions used to value the retained interest:

Key Assumptions 2008 2007



AutoLoans



AutoLoans

Prepayment rate 13.00% 21.38% 14.00% 13.00% 21.38% –Excess spread 0.82% 1.56% 3.50% 0.27% 1.60% 1.68%Discount rate 4.00% 4.56% 4.00% 4.50% 4.51% 5.91%Expected credit losses 0.0028% 0.1404% 0.1684% 0.0110% 0.1951% 0.1955%


The following table presents key economic assumptions and the sensitivity of the current fair value of the retained interest to adverse changes in each key assumption as at December 31, 2008. The sensitivity analysis is hypothetical and should be used with caution.


2008 2007



AutoLoans



AutoLoans

Fair value of retained interests $ 499 $ 5,495 $ 19,166 $ 261 $ 11,899 $ 13,676Weighted average remaining life 1.05 Years 1.19 Years 3.25 Years 1.49 Years 1.39 Years 1.55 Years

Excess spread, net of credit lossesImpact on fair value of a 10% adverse change $ (11) $ (3) $ (650) $ (9) $ (30) $ (267)Impact on fair value of a 20% adverse change $ (22) $ (5) $ (1,299) $ (19) $ (60) $ (533)

Prepayment rate (%)Impact on fair value of a 10% adverse change $ (2) $ (1) $ (49) $ (22) $ (8) $ (35)Impact on fair value of a 20% adverse change $ (3) $ (2) $ (214) $ (24) $ (16) $ (70)

Expected credit lossesImpact on fair value of a 10% adverse change $ (0) $ (0) $ (31) $ (0) $ (4) $ –Impact on fair value of a 20% adverse change $ (0) $ (1) $ (62) $ (1) $ (8) $ –

The Credit Union did not securitize assets in 2008 or 2007.


7. OTHER ASSETS2008 2007

Accounts receivable $ 21,774 $ 20,719Future income tax receivable 1,735 1,583Derivative-related amounts 4,942 41Prepaid expenses 1,501 3,542Intangible assets 3,882 4,536Total $ 33,834 $ 30,421


9. LOANS PAYABLE

The Credit Union has an authorized line of credit with SaskCentral in the amount of $75.0 million in Canadian funds and with Concentra Financial Services Association (Concentra) in the amount of $5.0 million authorized in U.S. funds. The interest rate on the Canadian account is the SaskCentral prime interest rate minus 0.50% and the U.S. account is based on the Concentra U.S. prime interest rate plus 0.50%. At the end of the year, the amount outstanding was $.96 million for the Canadian account and $1.54 million for the U.S. account (2007 – $nil for the Canadian account and $nil for the U.S. account). A General Security Agreement and an assignment of book debts are pledged as security on both lines of credits. The Credit Union is authorized to draw on a Quick Loan in U.S. funds up to $6.0 million with Concentra paying interest at U.S. prime plus 0.75%. At the end of the year, the amount outstanding was $nil (2007 - $nil).

The Credit Union is authorized to draw on Canadian funds up to $25.0 million through the Commercial Paper Funding Program with Concentra. Access to the funds is dependent on Concentra’s ability to raise funds in the commercial paper market. The interest rate is based on R-1 (low) Commercial Paper Market Term Rate plus 0.375%. At the end of the year, the amount outstanding was $nil (2007 – $nil).

8. PROPERTY AND EQUIPMENT2008 2007

CostAccumulatedAmortization

Net BookValue

Net BookValue

Land $ 3,511 $ – $ 3,511 $ 3,511Facilities 34,221 (9,674) 24,547 18,883Computer hardware and software 7,746 (3,670) 4,076 3,210Furniture and equipment 4,931 (2,619) 2,312 2,245Leasehold improvements 8,145 (4,709) 3,436 4,166Total $ 58,554 $ (20,672) $ 37,882 $ 32,015


10. OTHER LIABILITIES2008 2007

Accounts payable $ 30,128 $ 35,208Derivative-related amounts 1,905 509Deferred lease income 2,802 4,294Future income tax liability – –Patronage allocation payable 3,564 2,277Total $ 38,399 $ 42,288


11. SHARES AND EQUITY ACCOUNTS

The authorized share capital is unlimited in amount and consists of shares with a par value of $5 per share. In accordance with legislation, amounts held, to the credit of a member in a member equity account as allocated retained earnings, become membership shares issued by the Credit Union on an equal basis. Equity accounts are as provided for by The Credit Union Act, 1998 and administered according to policy, which sets out the rights, privileges, restrictions and conditions. These accounts are not guaranteed by Credit Union Deposit Guarantee Corporation.

The Board of Directors of the Credit Union has allocated 4% of personal members’ qualifying interest earned and interest paid in 2008 (3% in 2007) to be credited to members’ registered or patronage accounts. A portion of the allocation will be paid to members’ redeemable equity and registered accounts and is recorded as a patronage allocation payable in Note 10. The Board of Directors of the Credit Union has allocated 2% of non personal members’ qualifying interest earned and interest paid in 2008 (1.5% in 2007) to be credited to members’ registered or patronage accounts. The total equity allocated for 2008 is $6.06 million ($4.38 million 2007).

12. CAPITAL MANAGEMENT

Credit Union Deposit Guarantee Corporation (CUDGC), the regulator of Saskatchewan credit unions, has prescribed capital adequacy measures and minimum capital requirements. Effective July 1, 2008, CUDGC adopted a new capital management framework for Saskatchewan credit unions.

The new capital adequacy rules issued by CUDGC have been based on the recently introduced Basel II capital standards framework established by the Bank for International Settlements and adopted by financial institutions around the globe, including Canadian banks. CUDGC has implemented a new risk-weighted asset calculation for credit and operational risk. Noteworthy changes from previous year include a reclassification into lower risk categories for residential mortgages, aggregation of lending exposure, removal of unrealized securitization revenue and a new capital requirement related to operational risk. CUDGC required that all credit unions comply with the new rules for the reporting period September 30, 2008.

Under the new rules, CUDGC prescribes three tests to assess the capital adequacy of credit unions: risk-weighted capital ratio (eligible capital to risk-weighted assets); tier 1 capital to total asset ratio; tier 2 to tier 1 capital ratio. The risk-weighted capital ratio is calculated as the sum of net tier 1 and 2 capital divided by risk-weighted assets. Regulatory standards require credit unions to maintain a minimum risk-weighted capital ratio of 8.00%, a minimum tier 1 capital to total assets of 5.00% and tier 2 capital to tier 1 capital of less than 100.00%.

Eligible capital is the total of tier 1 capital and tier 2 capital less deductions related to intangible assets, securitizations and unconsolidated substantial investments, and is calculated in accordance with the rules prescribed by CUDGC. Tier 1 capital is defined as a credit union’s primary capital and comprises the highest quality of capital elements while tier 2 is secondary capital and falls short of meeting tier 1 requirements for permanence or freedom from mandatory charge. Tier 1 capital at the Credit Union includes retained earnings, membership shares, member equity/patronage accounts and deductions for securitization transactions (not included in the previous framework). Tier 2 capital at the Credit Union includes general allowance for credit losses to a maximum of 1.25% of risk-weighted assets (maximum of .75% of risk-weighted asset in the previous framework) and deductions for securitization transactions (not included in the previous framework). Risk-weighted assets are calculated in accordance with the rules established by CUDGC for balance sheet and off-balance sheet risks. Credit risk, derivative and off-balance sheet commitments and operational risk are considered in calculating risk-weighted assets. Based on the prescribed risk of each type of asset a weighting is assigned.


New capital adequacy rules have not had a significant impact on the Credit Union’s overall required level of regulatory capital as compared to previous capital requirements prescribed by CUDGC. The Credit Union manages capital in accordance with its capital management plan and board approved capital policies. The capital plan is developed in accordance with the regulatory capital framework and is regularly reviewed and approved by the Board of Directors. Capital is managed in accordance with board policy with a goal to achieve and exceed regulatory minimums, protect member deposits, meet operational requirements and absorb unexpected losses while meeting regulatory minimums that signal financial strength.

If the Credit Union is not in compliance with CUDGC capital requirements, CUDGC may take any necessary action. Necessary action may include, but is not limited to:

• reducing or restricting a credit union’s authorities and limits; • subjecting a credit union to preventive intervention; • issuing a compliance order; or • placing a credit union under supervision or administration.

During the year, the Credit Union complied with all internal and external capital requirements. Prior year numbers have been calculated using the previous CUDGC framework and have not been restated under the new framework. The following table summarizes key capital information:


Capital Summary 2008 2007Eligible capital

Total tier 1 capital $ 212,624 $ 190,916Total tier 2 capital – 5,122

Total eligible capital $ 212,624 $ 196,038

Risk-weighted assets $ 2,031,961 $ 1,963,883Total eligible capital to risk weighted assets 10.46% 9.98%Tier 1 capital to total assets 7.41% 7.41%Tier 2 capital to Tier 1 capital 0.00% 2.68%

13. Related party transactions

Loans receivable:At December 31, 2008, certain directors and management were indebted to the Credit Union for amounts totaling $3.3 million (2007 - $1.9 million). These loans were granted in accordance with the Credit Union’s policies and are included in loans on the Consolidated Statement of Financial Position.

Deposit accounts:Directors and management hold deposit accounts. These accounts are maintained in accordance with the Credit Union’s policies and are included in member deposits on the Consolidated Statement of Financial Position. Other:Remuneration paid to the Board of Directors in 2008 amounted to $161 thousand (2007 – $180 thousand) plus travel reimbursement of $65 thousand (2007 – $74 thousand).

14. Consolidated segmented information

The Credit Union’s operations and activities are organized around the following operating business segments: credit union services, real estate brokerage, insurance brokerage and mortgage brokerage. The operating segments identified are managed separately as individual business units. Each segment is distinguished by the services offered, as follows:

Credit union services – provides financial services to a variety of members and non-members within consumer, agricultural and commercial markets through branch, telephone and electronic delivery channels. Primary products and services include lending, savings, chequing, term deposit and registered products; as provided by Conexus Credit Union.



Real estate brokerage – provides a full range of real estate brokerage services to buyers and sellers; as provided by the subsidiary CENTURY 21 Conexus Realty Ltd.

Insurance brokerage – provides a full range of property insurance, casualty insurance, life insurance and motor vehicle licensing services to clients; as provided by the subsidiary Conexus Insurance Ltd.

Mortgage brokerage – provides full service mortgage brokerage services; as provided by the subsidiary CENTUM Canada Mortgage Direct Ltd.

The accounting policies of each of the segments are the same as those described in the summary of significant accounting policies. Transactions between segments are eliminated and such transactions are at terms that approximate fair value. The following highlights key financial information for the operations of these segments.

2008Credit Union

& Property Services

Real EstateBrokerage

InsuranceBrokerage

MortgageBrokerage

Inter companyElimination

EntriesTotal

Interest income 166,480 – – – (135) $ 166,345Interest expense 69,297 – – – (8) 69,289Net interest/gross profit 97,183 – – – (127) 97,056Provision for credit losses 5,518 – – – 0 5,518Other income 41,450 28,612 2,705 928 (7,051) 66,644Non-interest expense 96,630 28,417 3,309 848 (7,366) 121,838Income taxes 5,429 – – – 0 5,429Net income 31,056 195 (604) 80 188 30,915Total assets 2,901,603 6,095 2,015 55 (39,738) $ 2,870,030

2007Credit Union

& Property Services

Real EstateBrokerage

InsuranceBrokerage

MortgageBrokerage

Inter companyElimination

EntriesTotal

Interest income 154,456 – – – (633) $ 153,823Interest expense 65,776 – – – (2) 65,774Net interest/gross profit 88,680 – – – (631) 88,049

Provision for credit losses 9,823 – – – 0 9,823Other income 35,070 30,963 2,351 1,000 (5,457) 63,927

Non-interest expense 88,753 29,264 3,665 935 (6,888) 115,729Income taxes 4,597 – – – (0) 4,597Net income 20,577 1,699 (1,314) 65 800 21,827Total assets 2,602,332 10,866 2,089 82 (38,798) $ 2,576,571



15. Fair value of financial instruments The following table illustrates the significance of financial instruments by presenting the cost, fair values and recorded values. In addition, the valuation method for each class of financial asset and liability has been presented. Fair values are determined in accordance with the methods and policies previously described in Note 2.

Significance of Financial Instruments 2008

Cost Fair ValueRecorded

Value

Impairment Losses

Recorded

Total Interest Income

Total Interest Expense

Unrealized Net Gains or Losses Recorded

Realized Net Gains or Losses Recorded

Fair Value Valuation Technique

ASSETS

Available for sale financial assets

Investments

SaskCentral shares 21,508 21,508 21,508 – 3,159 – – – Cost (1)

SaskCentral debenture 4,740 4,740 4,740 – 272 – – – Third party modeling

Securitization retained interests 20,158 20,158 20,158 – 1,410 – – – Cost with impairment test(2)

Other 361 361 361 – – – – – Cost with impairment test (3)

Held for trading financial assets

Cash 26,008 26,008 26,008 – – – – – Published price quote

Investments

Concentra Financial 18,000 18,000 18,000 – 1,329 – – 43 Third party modeling

Federal and provincial government 14,276 14,368 14,368 – 276 – 247 (108) Published price quote

Other 60,621 60,552 60,552 – 1,531 – 387 251 Published price quote

SaskCentral - liquidity 255,046 259,808 259,808 – 8,991 – 4,525 473 Third party modeling

Derivitive related amounts 2,788 5,374 5,374 – 248 – 6,761 – Third party modeling

Loans and receivables

Loans 2,358,454 2,419,942 2,358,029 (5,518) 136,158 – – – Third party modeling

Other assets 28,674 28,674 28,674 – 23 – – – Cost approximates fair value

Non-financial assets

All non-financial assets 52,450 53,906 52,450 – 370 – – – Cost approximates fair value

Total assets 2,870,030

LIABILITIES

Held for trading financial liabilities

Derivitive related amounts 2,926 2,475 2,475 – – – (3,256) – Third party modeling

Other liabilities

Deposits 2,604,516 2,653,861 2,604,516 – – (65,825) – – Third party modeling

Loans payable 2,501 2,501 2,501 – – (208) – – Cost approximates fair value

Other liabilities 21,524 21,524 21,524 – – – – – Cost approximates fair value

Shares and equity accounts 19,804 19,804 19,804 – – – – – Cost approximates fair value

Non-financial liabilities

All non-financial liabilities 14,400 14,400 14,400 – – – – – Cost approximates fair value

Total liabilities 2,665,220

(1) The Credit Union has designated its equity investment in SaskCentral shares as available for sale and recorded it at cost. Fair value information is not disclosed because a quoted market price is unavailable in an active market and fair value cannot be measured reliably. The holders of SaskCentral shares are Saskatchewan credit unions and holders may redeem only with the approval of the issuer and subject to the limits provided in The Credit Union Central of Saskatchewan Act, 1999. The issue and redemption price of SaskCentral shares is determined with reference to bylaws of SaskCentral at $10 per share. The Credit Union is required to hold the current number of SaskCentral shares and has no intention to request redemption.

(2) Refer to asset securitization accounting policy in Note 2 for details.(3) The Credit Union has designated several other investments as available for sale and recorded it at cost. Fair value information is not disclosed because a quoted market price is

unavailable in an active market and fair value cannot be measured reliably. Cost has been determined the most appropriate value to assign to these investments. These investments are reviewed periodically for impairment and any decline in the value that is other than temporary is recorded in income.



Significance of Financial Instruments 2007

Cost Fair ValueRecorded

Value

Impairment Losses

Recorded

Total Interest Income

Total Interest Expense

Unrealized Net Gains or Losses Recorded

Realized Net Gains or Losses Recorded

Fair Value Valuation Technique

ASSETS

Available for sale financial assets

Investments

SaskCentral shares 17,257 17,257 17,257 – 2,502 – – – Cost (1)

SaskCentral debenture 4,740 4,740 4,740 – 280 – – – Third party modeling

Securitization retained interests 23,654 23,654 23,654 – 1,686 – – – Cost with impairment test(2)

Other 365 365 365 (34) – – – – Cost with impairment test (3)

Held for trading financial assets

Cash 36,399 36,399 36,399 – – – – – Published price quote

Investments

Concentra Financial 6,372 6,372 6,372 – 534 – – – Third party modeling

Federal and provincial government 5,176 4,958 4,958 – 181 – 119 4 Published price quote

Other 11,752 11,360 11,360 – 427 – (275) 31 Published price quote

SaskCentral - liquidity 231,846 232,082 232,082 – 8,655 – 1,193 381 Third party modeling

Derivitive related amounts 1,160 1,048 1,048 – 138 – 1,854 – Third party modeling

Loans and receivables

Loans 2,150,228 2,151,937 2,149,768 (9,823) 135,594 – – (86) Third party modeling

Other assets 22,231 22,231 22,231 – 43 – – – Cost approximates fair value

Non-financial assets

All non-financial assets 66,337 67,697 66,337 – 596 – – – Cost approximates fair value

Total assets 2,576,571

LIABILITIES

Held for trading financial liabilities

Derivitive related amounts 1,371 1,703 1,703 – – – (1,881) – Third party modeling

Other liabilities

Deposits 2,342,384 2,348,335 2,342,384 – – (61,936) – – Third party modeling

Loans payable – – – – – (1,957) – – Cost approximates fair value

Other liabilities 19,636 19,636 19,636 – – – – – Cost approximates fair value

Shares and equity 18,004 18,004 18,004 – – – – – Cost approximates fair value

Non-financial liabilities

All non-financial liabilities 20,949 20,949 20,949 – – – – – Cost approximates fair value

Total liabilities 2,402,676

(1) The Credit Union has designated its equity investment in SaskCentral shares as available for sale and recorded it at cost. Fair value information is not disclosed because a quoted market price is unavailable in an active market and fair value cannot be measured reliably. The holders of SaskCentral shares are Saskatchewan credit unions and holders may redeem only with the approval of the issuer and subject to the limits provided in The Credit Union Central of Saskatchewan Act, 1999. The issue and redemption price of SaskCentral shares is determined with reference to bylaws of SaskCentral at $10 per share. The Credit Union is required to hold the current number of SaskCentral shares and has no intention to request redemption. (2) Refer to asset securitization accounting policy in Note 2 for details.(3) The Credit Union has designated several other investments as available for sale and recorded it at cost. Fair value information is not disclosed because a quoted market price is unavailable in an active market and fair value cannot be measured reliably. Cost has been determined the most appropriate value to assign to these investments. These investments are reviewed periodically for impairment and any decline in the value that is other than temporary is recorded in income.

Total fee income and expense arising from financial assets or financial liabilities that are not classified as held for trading, are as follows: loans and receivables - loan fee income $1.7 million (2007 - $1.7 million); loan fee expense $2.3 million (2007 - $2.8 million); other liabilities - deposit fee income $7.9 million (2007 - $7.6 million) and deposit fee expense $1.8 million (2007 - $.97 million).



16. Nature and extent of risks arising from financial instruments

The Credit Union’s approach to management of risk is described in the Management Discussion and Analysis (MD&A) of the annual report. In addition to the MD&A, the Credit Union is required to disclose the nature and extent of risk associated with financial instruments as prescribed by CICA Handbook section 3862. These additional disclosures focus on the areas of credit risk, liquidity risk and market risk, and form an essential part of the Credit Union’s risk profile.

Credit riskCredit risk is the risk of financial loss resulting from a borrower or counterparty failing to meet its obligations in accordance with agreed terms to the Credit Union. The Credit Union’s estimate of its exposure to credit risk with respect to loans receivable is reported in Note 4 and Note 5. Credit risk primarily arises from the Credit Union’s direct lending activities. Credit risk management processes and controls for loansThe credit granting process is controlled by Board approved policies, as well as detailed loan policy manuals for each credit portfolio type: commercial, agricultural and consumer. These detailed loan policy manuals are developed, maintained and approved by the Lending Operations Department. Each credit application is assessed in accordance with these policies. The assessment of commercial and agricultural credit includes the assignment of a credit score in accordance with internal credit rating criteria. The Credit Union’s credit risk processes and controls relating to lending activities are managed through a centralized department – Lending Operations. The function of the Lending Operations Department includes development of lending policies, monitoring of organizational credit risk, and oversight approval of lending where the amount exceeds the authorization levels for retail management or where the underwriting is outside of the operational lending policies. Lending decision-making authority is determined in compliance with the delegation of authority set out in the credit risk management policies. The Lending Operations Department also provides approval and underwriting support to lenders for loans that are considered to be complex, unusual, higher risk or problematic. The detailed lending policies set out criteria to determine annual review requirements for all loan types to ensure adequate monitoring of the Credit Union’s credit exposure. Accounts that are deemed to be higher than average risk are subject to more frequent monitoring. These accounts are brought to the attention of the Lending Operations Department to provide direction on the specific monitoring requirements. Credit risk limitsThe Credit Union has implemented certain credit limits through Board policy. These limits are in place to manage the overall credit risk of the loan portfolio and establish parameters for credit diversification. The Credit Union has established limits for each loan portfolio type (agriculture, consumer mortgage, consumer non-mortgage and commercial loans), as well as maximum borrowing limits for individual borrowers.

For all types of mortgages (consumer, commercial and agricultural) the maximum credit exposure limit is 15% of capital and for non-mortgage loans the maximum limit is 5% of capital. As at December 31, 2008, the Credit Union was in compliance with all internal and external credit limits.

The Credit Union also controls credit risk with various risk mitigation techniques. The most common method used to mitigate credit risk is to obtain quality security from counterparties in guarantee of the Credit Union’s commitments. A second common risk mitigation method is to syndicate or securitize loans as a means of transferring to a third party a portion of the credit risk.



The following table illustrates the Credit Union’s loan portfolio mix as a percentage of assets at year-end:

Loan Portfolio Mix 2008 2007

Total Percentage Total Percentage

Consumer loansMortgage guaranteed $ 436,690 15.22% $ 401,332 15.58%Mortgage conventional 344,662 12.01% 268,598 10.42%Non-mortgage 363,544 12.67% 367,825 14.28%

Total consumer loans 1,144,896 39.90% 1,037,755 40.28%

Commercial loansMortgage 608,388 21.20% 548,753 21.30%Non-mortgage 307,588 10.72% 289,093 11.22%Government guaranteed 14,241 0.50% 15,848 0.62%

Total commercial loans 930,217 32.42% 853,694 33.14%

Agricultural loansMortgage 141,612 4.93% 149,386 5.80%Non-mortgage 119,403 4.16% 104,221 4.04%Government guaranteed 18,968 0.66% 18,675 0.72%

Total agricultural loans 279,983 9.75% 272,282 10.56%

Foreclosed property held for resale 2,205 0.08% 1,329 0.05%Accrued interest receivable 13,402 0.47% 13,102 0.51%General allowance for credit losses (2,686) (0.09%) (4,129) (0.16%)Total loans $ 2,368,017 82.53% $ 2,174,033 84.38%

GuaranteesIn some cases, the Credit Union obtains third party guarantees and insurance to reduce the risk of loan default. In total, 21% of the Credit Union’s loan portfolio is guaranteed by a federal government program or agency. The largest of these guarantees is in the residential mortgage portfolio, which is guaranteed by either Genworth Financial Canada at 11% or CMHC (Canada Mortgage and Housing Corporation), a government owned corporation at 8%. Other noteworthy guarantors include the Government of Canada’s Canada Small Business Financing Program (CSBFP) for small business loans at 1% and the Government of Canada’s Farm Improvement and Marketing Co-operative Loans Act (FIMCLA) program for farm improvement loans at 1% of total loans.

SecurityThe Credit Union has a credit risk management process that involves policies for the valuation of security on loans. Security limits are set based on the type of loan and industry with a related policy that dictates how security is valued. Updates for these valuations are performed periodically to ensure they remain reasonable. Market riskMarket risk is the risk of financial loss resulting from adverse changes on certain market variables, namely: interest rates, foreign exchange rates and market volatility. The primary market risk exposure of the Credit Union is interest rate risk, specifically, from timing differences in the re-pricing of assets and liabilities, both on-balance sheet and off-balance sheet. Interest rate movements can cause changes in interest income and interest expense and, although these changes move in the same direction, their relative magnitude will have a favourable or unfavourable impact on annual net interest income and the economic value (present value of estimated cash flows) of members’ equity. The extent of that impact depends on several factors, including asset and liability matching and interest rate curves. Financial instruments are managed to optimize the impact of interest rate movements in view of projected rate changes. Regular simulation modeling is performed to assess the impact of various risk scenarios on net interest income and the economic value of shareholders’ equity and to guide the management of interest rate risk.


Processes and controlsInterest rate risk is managed in accordance with specific operating and board policies. The policies set risk limits based on the impact of a change in interest rates on the following: annual net interest income, market value of assets and economic value of members’ equity.

The Credit Union uses dynamic simulation modeling to measure and manage the interest rate risk in its financial position. Using rate sensitivity analysis with probable rate scenarios, interest rate risk is managed to comply with the Credit Union’s policy requirement. For 2008, the Credit Union’s interest rate risk was within acceptable levels, as measured by board approved parameters. Interest rate risk is reported to the Asset/Liability Management Committee (ALCO). One of the committees’ primary responsibilities is to provide oversight and direction for the management of interest rate risk. ALCO establishes and approves targets and strategies related to interest rate risk management and liquidity management. The ALCO committee is comprised of the CEO, all executive senior management and other selected senior management from the areas of finance, risk management, marketing, lending and retail operations. The ALCO committee frequently reviews historical and forward looking performance and risk measurements as part of a standardized reporting package. These reports include simulation results on interest margin with stress testing and scenario analysis. Stress testing and scenario analysisStress testing and scenario analysis is performed as part of the monthly interest rate risk simulation process. These tests include the effects of most likely and stressed movements in interest rates on the financial position of the Credit Union and its current and projected net earnings. Interest rate risk stress testing includes illustrating the impact of the most likely scenario (based on the Credit Union’s rate forecast), a flat rate scenario, declining rate scenario (3% decline in prime rate over one year), rising rate scenario (3% increase in prime rate over one year), a shock down of 100 basis points and a shock up of 100 basis points (100 basis points is equal to 1 percent).

The following table illustrates the results of a 100 basis point shock for December 31:


2008 2007

100-basis-point increase in the interest rate:Impact on net interest income (for the next 12 months) $ 7,264 $ 3,859Impact on economic value of members’ equity $ (8,091) $ (9,449)

100-basis-point decrease in the interest rate:Impact on net interest income (for the next 12 months) $ (7,333) $ (5,223)Impact on economic value of members’ equity $ 7,697 $ 9,742

The impact of movements in interest rates on the financial position and earnings of the Credit Union is measured through a number of sophisticated tests, namely: income simulation, static gap analysis, stochastic analysis (earnings at risk), value at risk (economic value of equity) and duration analysis.

Income simulation compares the difference in net interest income in the rising, falling, shock up and shock down scenarios to the flat rate scenario. Static gap illustrates the maturity and re-pricing behavior of interest-rate sensitive assets and liabilities for se-lected time intervals at a specified point in time. Stochastic analysis measures earnings at risk using 243 various rate scenarios with a 90% certainty. Value at risk assesses the relative magnitude of interest rate changes on the economic value of members’ equity. Economic value of members’ equity is the present value of the estimated cash flows of assets less the present value of the estimated cash flows of liabilities. Value at risk is measured by assessing the impact of 100 basis points shock increase and decrease in interest rates. Duration analysis assesses the average duration of assets and liabilities providing a measure of structural mismatch between assets and liabilities, which in turn guides future decisions concerning the level of interest rate risk related to this mismatch.



Liquidity riskLiquidity risk arises from having insufficient funds to meet financial obligations without having to raise funds at unfavourable rates or selling assets on a forced basis. Liquidity risk stems from mismatched cash flows between assets and liabilities as well as certain product characteristics including commitments to extend credit and demand features on deposits. One of the Credit Union’s primary objectives as a financial institution is to prudently manage liquidity to ensure that the Credit Union is able to generate or obtain sufficient cash or cash equivalents in a timely manner, at a reasonable price and to meet commitments as they become due, even under stressed conditions. Liquidity management ensures variations in cash flows are managed on a daily and seasonal basis. Liquidity risk is managed through a three tiered structure: local credit union level; the Saskatchewan provincial credit union system tier; and the national Canadian credit union system tier. At the local level, the Credit Union liquidity risk is managed according to an established framework which includes: established strategies and policies for managing liquidity risk; maintaining a portfolio of liquid asset; measuring and monitoring funding requirements; managing market access to funds; contingency plans; and internal controls over management practices and processes. On the provincial level, SaskCentral manages a provincial statutory liquidity pool on behalf of Saskatchewan credit unions. On the national level, Credit Union Central of Canada maintains required levels of marketable securities to support national system liquidity needs. Liquidity management frameworkThe Credit Union’s liquidity management framework and liquidity targets and strategies are reviewed and documented in a Liquidity Management Plan. The plan also identifies the long-term liquidity requirements of the Credit Union and describes the strategies to meet any funding needs. The plan is periodically reviewed by management and approved by the Board of Directors. Liquidity risk is managed in accordance to specific operating and board policies. Board policies set out the level of acceptable liquidity risk and the Credit Union’s processes and controls for managing liquidity. As required by policy, the Credit Union has established limits and requirements with respect to: level of liquid assets; quality of liquid assets; concentration limits; cash flow mismatch limits; and procedural control requirements with respect to measuring and monitoring liquidity risk. Fundamental to the Credit Union’s liquidity management framework is the assessment of the adequacy of liquidity under both normal operating conditions and under stress conditions. Stress conditions may include a liquidity event or crisis. The Credit Union maintains appropriate contingency plans to handle such an event.

Member deposit liabilities are the Credit Union’s primary funding source. Accordingly, diversification of deposits by product type, counterparty and term structure is an important element of the liquidity management framework. The Credit Union maintains access to borrowing facilities as detailed in Note 9 to augment and diversify liquidity requirements. The Credit Union also uses securitization, loan sales and syndications to manage funding requirements. The primary measurement of the adequacy of the liquidity at the Credit Union is the operating liquidity ratio. This ratio is calculated as available liquidity and cash inflows divided by cash outflows. The Credit Union seeks to maintain this ratio to be greater than or equal to 150%.

The following table summarizes the Credit Unions liquid assets at December 31:

2008 2007

Cash and overnight deposits $ 18,000 $ 6,022Other marketable securities 67,955 9,760Other liquid investments held with Concentra – 350Statutory liquidity investments at SaskCentral 259,808 232,082Total liquid assets $ 345,763 $ 248,214



The following table provides the maturity profile of financial liabilities based upon contractual repayment obligations:

Processes and controlsVarious internal controls have been implemented into the liquidity management process. Specifically, the liquidity position of the Credit Union is regularly reported to executive management, ALCO and the Board. Included in the ALCO mandate is to review, monitor and set management risk limits with respect to liquidity. A review is conducted by the Enterprise Risk Management Department on the compliance to established liquidity policies and procedures and the interdependence of liquidity risk to other organizational risks such as strategic risk and credit risk. A periodic review is also conducted by Internal Audit on the liquidity management processes and systems of the Credit Union.

Stress testing and scenario analysis Stress testing and scenario analysis is performed to assess the adequacy of liquidity. Contingency plans address liquidity management under scenario events or stressed conditions. Stress and scenario conditions include larger than predicted deposit withdrawals and borrowing levels, as well as market disruptions resulting in limited to no access to capital markets. Ongoing testing concludes that the Credit Union has access to sufficient liquidity to continue to meets its obligations under normal operating conditions and stressed conditions.

17. COMMITMENTS AND GUARANTEES

The Credit Union has entered into lease agreements and other contractual commitments expiring on various dates to the year 2027. The lease agreements are treated as operating leases with rents charged to operations in the year to which they are re-lated. The aggregate lease and contracted payments in accordance with other commitments are as follows:

2008Floating

and up to 1 month

1-3 Months

3 Months to 1 Year

Total up to 1 Year

1-5 Years Greater than 5 Years

Non-Interest

Sensitive

Total

Liabilities and equityMember deposits $ 924,327 $ 117,747 $ 392,494 $ 1,434,568 $ 825,634 $ – $ 344,314 $ 2,604,516Other liabilities 2,501 – – 2,501 – – 38,399 40,900Shares and equity accounts – – – – – – 19,804 19,804Derivatives 13,823 43,906 (15,643) 42,086 (48,977) 6,891 – (0)Total $ 940,651 $ 161,653 $ 376,851 $1,479,155 $ 776,657 $ 6,891 $ 402,517 $ 2,665,220

2009 $ 4,4342010 4,1662011 3,3212012 2,7062013 1,553Thereafter 3,152Total $ 19,332

At December 31, 2008, the Credit Union had outstanding commitments relating to letters of credit, undrawn lines of credit and undisbursed loans in amounts totaling $588 million (2007 - $538 million).



18. COMPARATIVE FIGURES

Certain comparative figures have been reclassified to conform to the presentation adopted in the current year.

19. SUBSEQUENT EVENTS

The membership of Regina Wheat Pool Employees Credit Union (RWPECU) voted to amalgamate with Conexus Credit Union on January 1, 2009. Selected financial information for each of the combining credit unions as of and for the year ended December 31, 2008 is provided for reference.

20. FUTURE ACCOUNTING CHANGES

In February 2008, the Canadian Accounting Standards Board announced that Canadian generally accepted accounting principles (GAAP) for publicly accountable enterprises will be replaced by International Financial Reporting Standards (IFRS) for fiscal years beginning on or after January 1, 2011. The Credit Union is specifically scoped into the definition of a publicly accountable enterprise. As such, the Credit Union will be required to prepare the December 31, 2011 financial statements including comparative information in compliance with IFRS.

The Credit Union has developed a preliminary transition plan that establishes a cross-functional IFRS team. Extensive training has begun for the key employees of this transition team. The Credit Union is also participating in the National IFRS Readiness Project for Credit Unions sponsored by Credit Union Central of Canada and has begun analysis of the expected areas of impact.

Changes in accounting policies are likely as a result of this conversion. These changes may materially impact the Credit Union’s consolidated financial statements.

RWPECU Conexus Total

Assets $ 2,543 $ 2,870,030 $ 2,872,573Retained earnings $ 394 $ 204,810 $ 205,204Net income $ 47 $ 30,915 $ 30,962

Canada Mortgage Direct Ltd .

Documents

Annua Rert - Conexus Credit Union...Co-operative Principles Annual Report • 2008 1 About Conexus Conexus is a home-grown Saskatchewan company and we believe in putting our members,